private equity case study february 26, 2006 - franchise · private equity case study. february 26,...
TRANSCRIPT
2
Today
Steve CarleyPresident & CEO3333 Michelson DriveSuite 550Irvine, CA 92612949-399-2000www.elpolloloco.com
Glenn KaufmanManaging Director666 Third Ave., 29th FloorNew York, NY 10017212-476-8000www.american-securities.com
3
Brief History of El Pollo Loco
1975 - 1985 1985 - 1998 1999 - 2003 2003
Founded (yes, in Mexico!) and
launched in the U.S.
Orphaned Rebuilt for Growth
Disciplined Growth
American Securities partners with
management to buy company
Steve Carley Joins
4
What is it Like to be an Orphan?
• Denny’s Inc. purchases El Pollo Loco U.S. operations
• TW Services, Inc. purchases Denny’s, Inc.
• TW Services, Inc. recapitalizes in an overly leveraged LBO
• El Pollo Loco opens its 200th
restaurant
• TW Services, Inc. (renamed Flagstar Corp.) files for bankruptcy
• Flagstar emerges from bankruptcy as Advantica Restaurant Group
1983
1987
1997
1998
1989
1991
Parent Company Driven
1975 - 1980 1985 - 1998 1999 - 2003 2003
Founded (yes, in Mexico!) Orphaned Rebuilt for
GrowthDisciplined
Growth
• The strategy to grow Company units was inconsistent and often contradictory
– On one year and off the next• Company-operated restaurants were given little
attention • The decision to franchise or refranchise units
was based on balance sheet needs
• The Company’s franchising efforts suffered from no focus, no standards and minimal support for franchisees
• Resulted in an inconsistent product quality and brand message
• Insufficient investment was made in EPL’s infrastructure and systems creating a substantial need to remedy deferred expenditures
• Primary focus was on Advantica’s more troubled brands (Denny’s, Cocos, Carrows) leaving EPL with few resources
ErraticGrowth
Undisciplined
Under- Resourced
But our customers loved the EPL product and stayed loyal
5
The Ownership Transition
• American Securities Capital Partners and management bought from Advantica
• Committed to fixing the problems and making the investments required to rebuild/correct the past deferred investment and to sustain an ongoing growth program
• Reduced leverage!!
What Happened
1975 - 1980 1985 - 1998 1999 - 2003 2003
Founded (yes, in Mexico!) Orphaned Rebuilt for
GrowthDisciplined
Growth
• Stopped aggressive growth
• Stopped aggressive franchising
– No new franchise development agreements
– Shrunk franchise base from 71 to 54
What We Stopped
6
Rebuilding the Foundation for Growth – Investing Into the Company
American Securities and management committed to a substantial capital plan toward the chain’s long term success
• Restaurants– Remodeled and refocused on deferred maintenance– Redesigned and re-imaged units to be consistent with the brand– Re-engineered the buildings for efficiency of cost and function– Ultimately developed “next generation” restaurant, changing the
operational aspects of the business• Information technology
– Installed new back office systems designed for this type of business– Upgraded each unit in POS and communication– Laid foundation for continued IT improvement
• People– Deepened the group of world class executives/managers– Substantially invested in new HR/training/leadership department– Added area leaders to tighten span of control
7
Rebuilding the Foundation for Growth – Strategic Repositioning
• Based on a developed vision, over the last five years, EPL has strategically positioned itself between the traditional chicken/Mexican QSR and fast-casual Mexican market segments
Higher
Con
veni
ence
an
dVa
lue
Lower
Lower HigherMenu and DiningExperience Quality
QSR ($128bn)
Fast-Casual ($7bn)
8
Rebuilding the Foundation for Growth – Extending the Brand
• Unlike virtually any concept, EPL has been built around a highly leveragable and very differentiated single signature product that has survived through bad times and good
• EPL’s signature flame-grilled marinated chicken has always been, and continues to be, the primary ingredient in virtually all of EPL’s high quality, authentically Mexican product offerings
• EPL expanded its product line to better serve the broad demographic segment to which it appealed
1996
2002 2004
2005
Pollo Bowl®
2003
Pollo Salad
Upscale Burrito and Bowl Products
Chicken Verde Quesadilla ™
Chicken Quesadilla
9
25.7%24.5% 23.9% 23.6% 23.2%
20.2%
16.3%
27.8%
22.6%
0%
10%
20%
30%
Sonic EP
L
Pane
raBa
ja Fr
esh
McDon
ald's
Wendy
'sTa
co Be
ll
Rubio'
s
KFC
Schlo
tzsky
's
• EPL’s best in class restaurant level cash flow margins drive attractive returns relative to other restaurant concepts
Rebuilding the Foundation for Growth – Driving Unit Profitability
Source: RBC Capital Markets research report dated February 12, 2005; EPL data from Company records and estimates, calculated in a manner consistent with RBC analysis.
RESTAURANT LEVEL COMPANY-OWNED STORE OPERATING PROFIT MARGIN (Excluding occupancy costs)
EPL’s STORE LEVEL RETURN ON INVESTED CAPITAL (FULLY CAPITALIZED)
21.30%
28.30%
0.00%
10.00%
20.00%
30.00%
12/99 08/05
32.9%
10
New Growth Era -- New Unit Openings
127 136 134 137 137 142
157 171 178 185 191
151
0
50
100
150
200
250
300
350
2000 2001 2002 2003 2004 2005
Company Franchise
278293 305 315
322333
1975 - 1980 1985 - 1998 1999 - 2003 2003
Founded (yes, in Mexico!) Orphaned Rebuilt for
GrowthDisciplined
Growth
• Rebuilding in a disciplined manner gave the company an opportunity to re-engage in growing the business, this time on a much stronger footing and with more discipline
11
New Growth Era – The Future of EPL
• 7-10 new each year in existing markets
• Total of 143
New Company
Stores
Aggressive Franchise
Growth
• Total of 192
12
Private Equity Firms Are Not All The Same
Hold Period • Long Term vs. Short Term
How They Make Money
• Aggressive vs. Conservative Leverage• Driven by financial engineering or operational improvements
Style • Hands on/off• Culture
Value added • Just initial capital vs. long term investments• Value added beyond capital
13
My Thoughts on Choosing a Private Equity Partner
• Hello “Controlling Equity Partner”– Internalize intellectually and emotionally
• Establish Broad Strategic Alignment– Confirm CEO and management team’s participation vis a vis a private
equity partner• Leverage Formal and “Back-Channel” References Personally
– Probe any areas of concern• Discuss “Freedom of Action” Guidelines/Approval Authority in
Advance• Understand Formal and Informal Communication Expectations
and Roles• Actively Explore “Rules of Engagement” for CEO/Direct Reports
and Private Equity Members• Discuss “Disaster Scenario” Definitions and Implications on
Management Team Up Front
14
Steve CarleyPresident & CEO3333 Michelson DriveSuite 550Irvine, CA 92612949-399-2000www.elpolloloco.com
Today
Glenn KaufmanManaging Director666 Third Ave., 29th FloorNew York, NY 10017212-476-8000www.american-securities.com
15
American Securities Capital Partners: Overview
• Founded by William Rosenwald to manage his share of the Sears, Roebuck fortune
• Designed around the visions and needs of the wealthy individuals and families – long term, wealth preservation and desire to support the building of great enterprises
• 12 year history of top quartile returns, with no bad investments
• Currently managing $1.6 billion in capital
• Focused on companies between $50- 500 million in revenue
• Experienced investment professionals in both franchisor and franchisee settings
Background Our Philosophy
• Great Companies: Find good or great companies with strong position/ differentiation
• Invest with management: Always invest with management under the same terms – align incentives - we all win or we all lose
• Focus on upside to management: Increase management potential by granting meaningful options across the management team
• Low leverage: If we use leverage – keep it low, to allow companies to focus on business not balance sheet
• Add value: Act as a thought partner and add value in finance, strategy, growth, operations – but never interfere with management role
16
EPL 1999: From Our Perspective
• Strong, durable brand
• Established proven market position in Southern California
• Enthusiastic and capable management that wanted a true partner
• Neglected company that could benefit from investment across company and have less leveraged capital structure
• Substantial improvements available through focus, attention and proper incentives
• Opportunities to expand
Our Initial View Transaction
• Purchased EPL with management in December 1999 for $128.3 million in cash
• $44.4 million in equity• $15 million assumed capital
leases• Financed remainder with
syndicated loan (senior loan only)• Equity ownership
• ASCP 98.3%• Management excluding options
1.7%• Management with options 11.9%
• Invested substantial time and money in building partnerships with management
• Sharing ideas• Building bonds
17
EPL Partnership: From Our Perspective
• “Special” differentiated business• Strong management team• Healthy culture• True Partnership• Desire to build a great enterprise• Desire to be investors and share
in “win-together” philosophy• Ability for us to add value (which
differs based on the circumstances)
What we want What we got
• Company with very strong brand and market position
• Very strong management team that wanted to drive toward being great (and did it)
• Passion for building the brand• Culture centered around
excellence• Management as partners in every
sense• Openness of management team to
new ideas (without a “not invented here mindset”)
• Ultimately a great business, a great investment and a lifelong set of valuable friendships and relationships